R&D v. Marketing: Where Should Drug Companies Spend?

Just how much does the drug industry spend on R&D? And how does that compare to what it spends on sales and marketing? These are argument-inducing questions, but we now have some more data to argue about.

The latest issue of Nature Reviews: Drug Discovery has a paper
from three academic researchers on this very topic. Looking over the
past thirty years of drug company annual reports (and stock prices),
they find that the "sales, general, and administrative" category went
up slightly (as a per cent of total sales) in the 1975-2006 period,
from 32% to 39%. Interestingly, manufacturing and general cost-of-goods
was the leading expenditure in 1975 (43%), but this has gone down
pretty steadily to about 23%. And even more interestingly, the percent
spent on R&D has more than tripled over the same period, from 5% to
17%. Putting it mildly, this does not fit many of the narratives about
drug company spending over this period, and I'm going to be very
interested to see what reactions these numbers get.

The authors
go on to look at the effect of R&D spending versus SG&A on
stock prices and profits. There seems to be a pretty clear net positive
effect for research and development spending, and an equally clear
negative effect on the stock prices for spending on sales and
marketing. So why do companies allocate money to the latter? It comes
down to risk and cash flow. R&D is chancy, slower, and only pays
off intermittently. Promotion of existing compounds brings in more
immediate cash, in a generally more predictable manner. You also can't
rule out perverse short-term incentives, although the same trends held
up even when the authors factored out high-level executive
compensation. (And yes, big compensation packages also had a negative
effect on overall stock prices).

As in many things, there are
opposing errors to be made. If you spend all your money just on the
drugs you have now, you'll eventually have no more to sell, since
patented drugs are wasting assets. On the other hand, if you go totally
to spending on the R&D side, you may well run out of money before
you ever find anything else to sell. . .

Derek Lowe is a drug discovery chemist with 20 years of experience in the pharmaceutical industry, which is still very much his day job. He's worked on projects targeted at Alzheimer's, cancer, diabetes, infectious diseases, and other areas, but like most discovery scientists in the business, he has yet to produce a marketed drug. Explaining how and why this happens is what led to the launch of his blog, "In the Pipeline", in 2002, and the explaining continues. . .